TUMULT IN TUNISIA AND EGYPT FITS THE EXPLANATION I’VE GIVEN

Make no mistake about what’s now happening in Tunisia and Egypt. It is similar to the European protests that have taken place in Greece and Spain. It’s all to do with a concoction in the distribution of wealth.

Egypt’s well educated younger people are finding they’ve no jobs to go to. What is the purpose of education if the economic system is foundering and employment can’t be found? Where has the economy gone wrong and why are wages so low, anyway?

These are fair questions, and will increasingly be asked in places around the world where the privileged few continue to steal economic opportunity from others. 

Americans and Australians may be expected to be late in taking to the streets. Most are in deep distraction, having entertained themselves to a standstill, certainly into a stunned silence on any consideration of the vast gap between themselves and the privileged few. They have their iPhone and Facebook and all’s right with the world.

What is happening around the globe isn’t the politics of envy; it’s rapidly becoming the politics of survival.

But governments have no answers because they won’t address the chicanery in the process that directs wealth away from the middle class and the poor.

As I’ve recently been asked to re-explain the basic perversion in all economies, I’ll try to do so again here.

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The American social philosopher Henry George noted when taxation is introduced into the distribution of annual production (P), it diminishes the earnings of labour and capital.

In itself, this isn’t a surprise, but if the returns to labour (W) and to capital (I) should not be taxed, how can necessary government be funded?

George said the public revenue ought to come from natural resource rent (R), the surplus arising out of production by the mere existence of the community – that is, not from the efforts of private individuals nor companies.

In other words, where production is distributed to land, labour and capital as rent, wages and interest (P = R + W + I), taxation upon labour and capital would be unnecessary were the annual rent of land and natural resources to be captured for public purposes (P – R = W + I).

If the theory is true, it should be demonstrable in actuality.  It is.

But it can only be shown in the negative, because we publicly capture only a small percentage of our revenue from land and natural resource rents. Therefore, George’s corollary should hold. That is, if we fail to capture publicly-generated rent, wages and the return to capital will fall, and privatised rent, expanding at the expense of labour and capital, will repetitively create unnecessary periods of recession and depression. 

OK, let’s see if this is so:-

• The following chart demonstrates the decline in average real wages in the US. (US Bureau of Labor statistics extend back further than those of the Australian Bureau of Statistics, which commencing in the mid-80s nevertheless show the same pattern).

 Be warned, the apparent increase from the late 1990s is when the CPI was re-defined!

• This next chart shows the declining after-tax incomes of labour and capital and the increasing share of GDP to taxation and privatised economic rent.

• And here is the picture of real estate booms leading to economic recession in Australia. I developed it, along with the previous graph, and believe it to be unique.

As these are the most basic data relating to the production and distribution of wealth, Henry George’s case is proven, before we concern ourselves with money, credit and debt, which are not wealth but tokens of exchange.

From Henry George’s theory, it would follow that increasing amounts of credit necessarily have to be extended to labour and capital after the fact, because their fair returns have been diminished by taxation. Meanwhile, inadequate land value capture has created unaffordable land prices. It’s not the price of homes that skyrockets, it’s the land.

Therefore, explaining industrial depression in terms of money, credit and debt, which have no place in the above fundamental distributional formula are ex post facto and this is a logical fault.

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Although one income is earned and the other is not, neoclassical economics signed onto the scam that makes no distinction between the returns to land and capital in order to defeat Henry George’s conclusions (which I consider to be proven above). 

Failing to address the misdistribution of wealth to the wealthy can only have two outcomes, people turning either to fascism or socialism in the vain hope of a remedy.

A radical centrist alternative that doesn’t lead to war is possible: correcting this perverted distribution of wealth by the capture of economic rent for revenue instead of taxes.

Most Australians have a feeling there’s something wrong with the manner in which Australian Prime Minister Julia Gillard proposes to assist the tragically flood affected residents of south-east Queensland. They need our help, but is increasing income tax the way to do it?

Of course not.

An Abbot-led Liberal government would certainly have done no better, but Prosper Australia’s David Collyer today shows how the Labor government has let another positive opportunity (that could have more easily been sold to the Australian people) slip through its grasp.

Moreover, when capturing land rent, valuations of catastrophe-affected lands will decline sharply and naturally, to recognise the plight of people. As land value always fairly reflects owners’ situations, they will always make the best revenue base. Relative incomes don’t do this. Big landowners recoup their taxes in the rise in the price of their properties.  Can renters and the poor do this?

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Barack Obama has just completed a most inspiring piece of rhetoric – a brilliant pep talk encouraging Americans to do better.

Although the US President did touch upon closing loopholes and stopping rorts in the tax system (particularly those favouring the wealthiest 2% of Americans), he didn’t find a place to grease the wheels of productivity with economic rent.

Therefore, stuck with advisors steeped in their neoclassical economic training, Obama unfortunately won’t be able to deal with US debt nor meet his high-minded agenda.    

Without the re-discovery of natural resource rents, the future is bleak for America.  🙁

At least, on Australia Day, Australians can celebrate that they have the Henry Review recommendations on the backburner.

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[My other post today is below.]

… NOT VALUERS

Real estate valuers come in for a shellacking from time to time. Some Australian banks even tried to blame them for the 1991 recession, hoping they could sue them for losses the banks made when commercial property values collapsed as much as 75% in central city locations.

A friend yesterday asked me what I thought about the following article by Adam Schwab in Crikey yesterday:

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I agree with the thrust of Schwab’s piece. It’s a good article, except for his attack on valuers as a group based upon a rather contrived example. It’s akin to painting all lawyers such as Adam as being negligent because not all of them are perfect. It’s nonsense.

I replied to my friend that, like lawyers, there are good valuers and not-so-good valuers, and the incidence of valuers relying on only one sale (even if it was the sale of the house next door) without further inquiry is tiny and remote.

It won’t be bad valuations that bring our banks down, but a general collapse in property prices as Schwab himself says. He’s also correct that “Banks aren’t completely reckless — they don’t simply lend money to anyone.”

Even when the market is bubble-inflated, valuers are required to assess potential sale properties at current market value. But they won’t accept a contract price as the market value of a property if it differs from the weight of comparable sales evidence. 

Although the valuer does provide comments on the risk of the market declining, this is usually ignored by many bankers who simply want to provide a mortgage based upon the market valuation provided by the valuer. Most treat comments on the level of risk to the current price declining as merely conjectural, believing lending only 80% against the value will cover any risk of a decline in property values.

Yes, Sir Ralph Norris is paid excessively from the public rents banks accumulate unto themselves, Adam, and I agree the banking system has failed us. But am I now being just as tough on bankers as Schwab is on valuers? No, I don’t believe  so. There is a structural problem here that needs to be addressed; repetitive failure of bank risk management is central to needless boom-bust cycles and I’ve written about it before.

Until the banking system and governments address the fact that bubble-inflated land prices have an ability to disappear overnight, we’ll continue to repeat financial and social collapse.

IF IT QUACKS LIKE A DUCK AND WADDLES LIKE A DUCK, IT’S A DUCK

The Age reports today that Wendell Cox’s Demographia has released a study showing Melbourne to be 321^st on a list of 325 most affordable world property markets.

In other words, we’re almost the world’s most unaffordable market: almost the world’s dearest city. Incredibly, London, with a population of 7.6 million is said to be cheaper than the city of Geelong which is home to a population of only 200,000 souls.

Amongst more important things I’ll mention later, it could be argued that homes and sites in Geelong are generally larger than those in London, but that’s not mentioned by Cox. Instead, he shoehorns Melbourne’s astronomical residential property prices to square with the extraordinary claim that they’re a result of its zoning regulations. Perhaps this means Melbourne also has the 321^st worst residential zoning regulations in the world?

A “shortage of land” to explain ludicrous land prices was also the story put about by real estate agents in California just before its real estate bubble burst in 2007. For one reason or another, they (and Cox) don’t want to accept the rather obvious connection between California’s high land prices and the ceiling Proposition 13 had put on its property tax in 1978.

A strong case may be made that it was a combination of a relatively low property tax regime, necessitating higher taxes on productivity, which turned the once golden State of California into America’s economic basket case. It is no coincidence that the highest property tax-paying states in the US have proven to be its best economic performers; the property tax warns off the land speculator whilst enabling other taxes to be kept to a minimum.

Ken Henry’s review of the tax system caught up with the principle of capturing publicly-created economic rent by taking taxes off productivity and putting them onto land and natural resources, but the government has run scared of any such fundamental reform, preferring not to attempt to educate people to the principles behind such a proposed revenue switch. There’s a vast property and mining lobby to be appeased. Such timorous leadership consigns Australians to repeat the sorry saga of property bubbles and ensuing economic busts.

Wendell Cox and his ilk don’t particularly like zoning controls. They smack of excessive government interference with development. But whilst many examples may be found of excessive bureaucratic intervention in the development process, the zoning of land is clearly not the culprit for high prices.

It cannot be, because there is no shortage of suitably zoned residential land in Melbourne, now, nor previously. Yet the Housing Industry Association, Urban Development Institute of Australia and the Property Council of Australia have signed up to this explanation instead of understanding the dramatic benefits Ken Henry’s proposals would bring to industry and sustainable development .

There’s more than enough residentially-zoned land around Melbourne, and a massive amount of vacant and underutilised land within its existing boundaries. Nevertheless, Wendell Cox has found such admirers as the Institute of Public Affairs’ Alan Moran  to support his vacuous conclusion. The Ayn Rand-like baggage to delimit zoning controls, if not get rid of them altogether, has come to override their logic.

Like most people untrained in the theory of valuations, Cox and Moran haven’t yet discerned that land price is the capitalization of that part of the economic rent of land which has not been captured to the public purse. The amount privatised simply becomes capitalized into the land price of a block of land.

Except for relative locational values, supply and demand plays little part in the price of a residential lot. Up-front government development costs play a far greater role. We allow too much publicly-generated economic rent to be privatised by a relatively few individuals, and Wendell Cox is their spokesperson.

As with real estate interests, who don’t appreciate the principles behind land-based revenues, Australia’s big mining companies recently also displayed a preference for retaining the public’s rent in their profits. Of course, banks also captured the economic rent of land from the public via interest and capital mortgage repayments on bubble-inflated prices. In both cases, the big boys will take it if the public doesn’t claim it.

For corroboration that a land price bubble is the result of inadequate rent capture, Cox and Moran could do worse than consider the early affects of Canberra’s land rent system. Public rent capture in the ACT initially kept both land prices and local taxation at bay, until the system was eventually undermined by the failure to maintain land rent payments at anywhere near market levels.

Since then, vested interests and ignorance have done their darndest in the ACT to ensure that there’s no difference between what is now only a nominal land rent system and freehold ownership in Australia.

Interestingly, when there was once no damaging income tax, it was often incumbent upon the freehold owner to pay his annual ‘quit rent’ if he wished to remain in possession of his property. (Owe[n]er: Middle English: He who owes the land rent.)

Contrary to Demographia’s conclusion, my 2007 study “Unlocking the Riches of Oz: A case study of the social and economic costs of real estate bubbles 1972 to 2006” shows the international fashion for reducing land and property taxes, which has amounted to a virtual contagion from the outset of the 1970s, to have been responsible for stimulating each of Australia’s four real estate bubbles.

In an explosion of purple rage to the Heartland Institute on 4 July 2007, Wendell Cox castigated me for being anti-suburban for having pointed out his logical error in blaming zoning controls for bubble residential prices. I also showed the US cities he held so close to his heart for having the least zoning controls also had the highest crime rates in the United States. His own home city of St Louis topped the US crime list with its incredibly high murder rate. To let municipalities grow in an unbridled fashion in an environment of high taxation and inadequate infrastructure invites poverty and criminal behaviour.

Hopefully, the strange conclusions Cox and his fellows draw from their data will one day come to be seen for the canards they are. Meanwhile, the press will continue to report them dutifully as fact.

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Breakfast Radio 3AW’s Ross Stevenson this morning asked Wendell Cox whether our ‘negative gearing’ of real estate had anything to do with Australia’s unrealistically high property prices.

“Probably not” (or something to that effect) said Wendell.  “I don’t know much about that.”

Nor anything much about how the failure to collect economic rent instead of taxes created this worldwide real estate bubble, Wendell!

When I first discovered the Georgist School of economics, I probably experienced much the same feeling European navigators had when they “discovered” the Americas and Australia.

Here was a new continent, unknown to western civilisation: tangible and true – a new world of opportunity.

Trouble is, where Europeans chose to work indefatigably to develop those opportunities in the Americas and Australia (and we can’t deny this was often done with a rapaciousness that came at a horrible cost to the native populations),  the Georgist school has continued to be kept a secret from the world.  Why?

Whilst Chicagoan, Keynesian and Austrian economists cling to the restrictive neo-classical limits of their shorelines, the vast new territory that is Georgism remains pristine, untouched – even though it offers incredible opportunities to resolve forever many of the problems that currently beset the world.

Perhaps it’s time for the world to discover that the 50% of the economy that is economic rent – not the miserable one to two per cent guessed at in Jan Pen’s Income distribution: facts, theories and policies (1971) – is owed back equally to everybody because they create it?

Once known and really understood, the implications for the freedom of humanity will prove more important than the discovery of new continents.

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… ABOLISH TAXES AND PAY THE RENT

I hyperlinked my last post to Taylor Caldwell’s attack on income taxes. It echoed Thomas Jefferson’s warnings that, by having citizens of America work for government, income tax would enslave them.

In view of these incredibly strong words, why do we simply accept the levying of income taxes today?

The Progressive Income Tax equates to slavery? Certainly. Enormous bureaucracies are engaged looking into our private business affairs. Big Brother has been with us for quite some time.

And, if we acknowledge the current inability of nations such as Portugal, Ireland, Italy, Greece and Spain to meet their international liabilities, it may indeed be seen that the peoples of these nations have been made slaves to their creditors; they’ve been subordinated to debt and bank bailouts. People matter only insofar as they will underwrite these debts with their incomes for two or three generations.

And it’s not to draw too long a bow to add the USA to the top of the sovereign risk list. Britain might also be thrown into the mix.

However, these countries will prove only precursors of every country on the face of the earth, because we’re having the economic depression of all depressions if you are able to pierce through the veil of media denial, folks.

How then did we ever come to accept income taxes?

Income tax was introduced at the federal government level in the USA as a WWI measure, and in Australia during WWII. Governments knew that war emergencies were the only manner in which people would ever accept the introduction of an income tax nationally at the time.

But the oligarchy’s job was done and we succumbed to it by not insisting income tax be revoked after the wars. We thereby made ourselves slaves in fact.

As much as I don’t care for the ideas of the Tea Party movement, it is undoubtedly correct to identify income tax as problematic. Unfortunately, the Tea Party doesn’t understand how economies work, and in this it is like just about everybody else.

If economists and others came to understand the economic distributional relationships between the returns to natural resources, labour and capital, P = R + W + I, they’ll see there’s no place for taxation, that ALL taxes on earned incomes enslave citizens, people who comprise the backbone of economies, and that they may be liberated only by the public capture of publicly-generated land and resource rents.

Of course, the oligarchy wrongly believes it’s in its interests to keep them ignorant of these facts and under the serfdom of depression-inducing taxation. It’s not, because even the oligarchs are going to suffer big time in this one.

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OTHER TRAGEDIES: DROUGHTS AND FLOODING RAIN

Few countries are free from devastating natural phenomena of one sort or another, whether it be bushfire, cyclone, tornado, earthquake, volcano, flood or landslip.  

In February 2009, 173 Victorians were tragically killed in bushfires. Twenty is unlikely to be the final number of those drowned in the floods of south-eastern Queensland last week. This week lesser, but nonetheless devastating, floods have now been visited upon people in many parts of rural Victoria.

Dorothea Mackellar’s touching “My Country”, of which most of us know smatterings, told years ago of the drought and flooding rain that do not lessen her love (nor that of most Australians I would think), for the beauty and terror of a country that she says is no England. I can’t reproduce the poem here because agents for the estate of Dorothea McKellar have extended the copyright and won’t allow me to do so, but why not Google it if you want to read it in its entirety?

Meanwhile, those Australians remaining bereft as a result of fire, flood and drought still require our assistance. Our perverse system of revenue will ensure, however, that it proves to be hopelessly inadequate.  🙁

… ANSWER FOR YOURSELF

Bloomberg tells us US Fed officials saw the housing bubble in 2005 but didn’t alter policy. We are told Greenspan did increase interest rates but that he didn’t warn the US strongly enough.

OK, so what’s new? What could he have done without scaring the horses? Even if he’d increased interest rates 5% in one fell swoop, it wouldn’t have done a thing.

There’s only one way to curtail a property bubble, and Greenspan and his crew know it, but he wouldn’t recommend the government employ it to put an end to repetitive real estate bubbles because it cries “Enough!” to the great rort the banking system perpetrates upon us all.

Banks capture the rent of land, one-third of the economy, by way of mortgage repayments on the land-inflated price of real estate.

The scam can only be put paid to by governments capturing land and natural resource rent for public purposes instead of taxation.

If we haven’t the will for that, we can write all the stories we like about Greenspan and other distracting individuals, but we must ultimately blame ourselves for being played for idiots in the creation of economic recession or depression – and then coming back for more.

We lack not only the intestinal fortitude to do the right thing, preferring to be taxed on our comings and goings, but also have a remarkable ability to deny that this is the only course of action we may take to stop being ripped off by the already super-wealthy.

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THE NEW PAX SINICA

China isn’t going to come out of the first depression of the twenty-first century unharmed, but it is clearly going to emerge as the new economic leader.

With history as a guide, the transition to the new Chinese peace won’t be without conflict.

What does China’s emergence say about capitalism versus communism?

Not much; remember, European communism collapsed in 1989.

The Pax Americana downfall, like Pax Britannica before it, rather suggests Shakespeare’s  Lord Polonius had it just about right in Hamlet: “Neither a borrower nor a lender be”.  More particularly, maybe a borrower of the impossible trillions of dollars the United States of America owes the world? She couldn’t even pay the interest on her debt were she to garnishee the wages of every US citizen. Here’s a Wikileak secret: the US has been an example of government in complete disarray. (Keep that to yourself, because the media has been doing so.)

Don’t hold your breath if you are Tea Party-inclined, or a ‘money as debt’ person. If government, not private banks, were to strictly control the issue of money, we’d be no better off if we continue to provide credit against the so-called ‘security’ of land price.  

To the collapse of each civilisation before ours, to every economic depression, we may accurately assign the lending of money against ephemeral land price, i.e. failure to capture its rent for necessary government, as its cause. 

You’d think we’d learn, but Jews and Christians alike are slow learners. History’s millennia demonstrate Moses wasn’t just whistling Dixie with “The land shall not be sold forever, for the land is mine, and you are but strangers and sojourners with me.” (Leviticus 25:23)

Now the baton is being passed to China, I wonder whether she’ll do any better in this regard.

She’s had a couple of great people point her in this direction:-

“Once, natural resources were fully used for the benefit of all, and not appropriated for selfish ends. This was the age of the Great Commonwealth of peace and prosperity.” – Confucius (551-479 BC)

“The land tax as the only means of supporting the government is an infinitely just, reasonable, and equitably-distributed tax, and on it we will found our new system.” – Dr. Sun Yat-Sen (1866-1925)

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I regularly make the point here that we’re having this financial collapse (which will prove to be a depression) because the study of economics isolates itself from the real estate market – and never the twain shall meet.

I argue that many people in real estate, like me, have a better idea of what’s happening in the economy because we’re happy to integrate real estate with the economy. [Here’s another real estate person who can tell you of the future of retailing, depression or no depression.]

Oh sure, looking over their shoulder, some economists now refer to the involvement of real estate in the collapse but, not understanding its deeper role, they will only provide a most superficial analysis.  Otherwise, Austrian economists, and others, wouldn’t reduce the reason for the downturn to one of “easy credit” as they do.

It’s like this. Banks and financial institutions provide credit to customers believed to be ‘creditworthy’. Virtually all creditworthy clients offer a mortgage over real estate assets.

The nub of the difference on this issue is that economists and bank managers don’t understand that the land price component of a mortgage is more than nebulous; it’s a chimera. Where they believe land price to be a thing of substance, like a dwelling, many real estate valuers and agents know that fire-breathing dragons will disappear in the full light of day.

Once land price is seen for what it is, that is, the wanton private capitalisation of the public’s uncollected rent, it becomes apparent that the price of land does not reflect conditions of supply and demand as argued mindlessly by some economists. 

So, no, the problem isn’t one of easy credit and low interest rates: it is that credit can be provided against land price, an ‘asset’ that can disappear overnight.

So, rather than easy or excessive credit, the issue still remaining completely unaddressed is one of risk management, namely, why do banks keep lending against a ‘value’ – rather a price – that will disappear, like a chimera?

As land price is too volatile, why not capture its rent, in order both to reduce and stabilise land prices and abolish damaging taxes?

This problem’s not going to go away until we fix it.